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Boeing’s game-changing move is just the beginning

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Reports of aluminum heat-treat plate's demise in the aerospace industry have been greatly exaggerated, analysts say, despite the persistent onslaught of headlines about the impending switch to carbon fiber composites.

Despite the encroachment of lightweight composites, aerospace aluminum plate demand will register a 40-percent increase over the next four years, peaking at slightly less than 700 million pounds annually vs. 500 million pounds currently, according to Kevin Michaels, principal and co-founder of AeroStrategy LLC, Ann Arbor, Mich.

Michaels said he completely understands why there is a perception among the public that composites will soon eliminate the need for aluminum plate, but there isn't really any data to support that outlook. That's why AeroStrategy embarked on a wide, sweeping raw materials market assessment study over the past year. "We were frustrated by analysis by antidote, where someone would throw out that the (Boeing Co.) 787 is 52-percent composite so aluminum must be dead," he said. "We found out that just isn't true. People are still going to be making planes that have a very high aluminum content."

But there are some dark clouds on the horizon. According to the AeroStrategy study, the aluminum aerospace market will start to edge lower in 2012. "That will happen because of a combination of the anticipated downturn in deliveries as well as full production rates (being achieved) for higher composite-content aircraft," Michaels said. "But the interesting finding is that even with that, aluminum demand in 2015 is (expected to be) higher than it is today."

But pretty much every analyst queried said it's past time for aluminum producers to adapt and proactively face the threat of composites. Specifically, the emergence of Boeing's 787 Dreamliner, which has only a 20-percent aluminum content, should be a real wake-up call for the aluminum community.

There has been a movement toward lighter planes during the past few years, Michaels said. "Even before the relatively recent surge in oil prices, there was a major push to lighten aircraft. There is a massive economic imperative to reduce fuel consumption and the aircraft's weight."

Taking a broad view, titanium, carbon fiber composites and aluminum-lithium alloys are going to win when it comes to light-weighting at the expense of traditional aluminum and some steel alloys, he said. "If you are one of the aluminum companies, you have a real imperative to develop advanced alloys, such as aluminum-lithium, as fast as you can to better compete against composites. That is going to be absolutely critical."

While Michaels doesn't expect the recent hike in oil prices to significantly impact the pace of production, he said the near-term reaction is that operators are going to ground old, less-fuel-efficient aircraft as a means to conserve cash.

"What really matters is the production rates, and those aren't changing as a result of high oil prices. Manufactures like Boeing and Airbus (SAS) have backlogs of four to six years. We will have some cancellations of orders, but not enough to change production rates," he said.

However, there are clearly some analysts that, after three years of record plane sales, say a slowdown in orders might become inevitable because airlines can't keep up with the cost of fuel.

With oil hovering around $150 a barrel, jet fuel prices have surged 67 percent from 2007 levels, according to the Washington-based Air Transport Association of America. The trade group, which represents U.S. airlines, notes that fuel now accounts for about 40 percent of airline costs, up from around 15 percent in 2000.

If oil stays above $135 a barrel for the rest of the year then airlines will lose $6.1 billion in 2008, according to Giovanni Bisignani, director-general and chief operating officer of the International Air Transport Association in Geneva, Switzerland.

"Although the Boeing backlog is currently huge, we expect declining orders and delivery deferrals to result in a flattening off in production from 2010," Rob Stallard, analyst at New York-based Macquarie Capital USA Inc., said in a research note.

While the short-term pace of production likely won't be affected, the high price of oil is already slowing the rate at which airlines place orders. Orders for Airbus' A380 are running about one-third lower than previously predicted for this year as higher fuel costs and an economic slowdown continues to dent travel, John Leahy, the company's chief operating officer, said. Airbus might receive only about 20 orders for the 525-seat jetliner in 2008, he added.

Also, Boeing reportedly received 67 new orders (61 for 737s and six for 777s) in May vs. 92 in the same month last year.

In the short term, aluminum will continue to enjoy strong demand from the aerospace sector, but producers will have to act decisively to counteract the growth of composites in aircraft construction, Ronald Epstein, aerospace analyst at Merrill Lynch & Co. Inc., New York, said, adding that the strong aerospace cycle should continue through 2010 or 2011. But by the beginning of the next cycle, aluminum producers are going to have to change their strategy, he said.

The 787 Dreamliner is a "game-changer," Epstein said, heralding a secular shift toward composites as it has a far higher composite content vs. aluminum alloys than any previous aircraft.

The decision by Bombardier Aerospace early this year to make the fuselage of its new C Series aircraft—expected to be ready for initial deliveries by 2012—largely of composites, with the structures comprised of aluminum-lithium alloys, could very well foreshadow what Airbus and Boeing might do in their next-generation planes, another analyst said.

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